RUSSIAN BANKING COLLAPSE INEVITABLE

Over the past months we have come to understand what Russia has been doing to sustain its war effort in terms of funding.

These include direct and public funding of the war that’s estimated to be around 6.5% of GDP, but around 35% of government spending. This always seemed suspiciously low, as did the official inflation rate at 9.5% when interest rates were hiked to 21%. You do not need an interest rate that high to tame 9.5% inflation.

Russia has been pulling a sleight of hand, hiding from its own people and the international community what it has been doing. It has basically been using the commercial banking sector to force loans at referential rates on to armaments manufacturers – even when the government, and the banks being forced into the loans, know they are high risk and unlikely to ever be paid back.

Banks don’t like investing in weapons manufacturing unless they can see a return on their money. There is a fundamental issue with weapons manufacturing – you generally only have one customer – the government. And governments can be fickle when it comes to sustained orders. The product the manufacturer makes tends to get destroyed, it has little in the way of any ability to create or generate wealth or income. It’s also a feast or famine industry, high risk, high income in war (if it lasts long enough) and high risk and low income in peace.

Banks are notoriously loath to take risk. They like certainty and when they don’t like the certainty factor or think it lacking, they don’t lend the money in the first place, or they charge higher interest because the risk is higher. Yet at the same time they’re well aware that high interest loans are rarely paid back in full when granted to a high risk venture. Imagine then, what they feel about being forced into loans they would never have granted any other time, and they know are unlikely to ever be repaid?

Russian banks have been given no options. The amount they have loaned to the arms industry is said to be around $250-300 billion. They have no more money to lend. The central bank could ‘print’ money – these days you simply add however much you want to the mythical ‘Big Computer’ that knows how much money there is in circulation and let the banks take that cash (nowadays known as quantitive easing), and use it. The trouble when you do that is you add billions into circulation that has to go somewhere – and wherever it goes it will increase purchasing and that will create demand shortages and that causes inflation. And that really means increasing interest rates to dampen demand. The cycle of worsening economic news merely stampedes towards disaster ever faster.

Russian commercial banks like most banks around the world, would normally only keep about 10% of the money we put on deposit with them as cash. That’s enough that it can cover almost any day to day demand if people go to the bank and ask for their money. However, if everyone went to their bank – and so did everyone else go to theirs, because the rumor got out that the bank or banks don’t have any cash, that becomes a ‘run’ on the banks. Inevitably the transactions would stop and the accounts would be frozen while the government ‘manages’ the situation.

There is almost no way this isn’t going to happen in Russia this year. Sooner or later the state of the banks is going to come home to roost. They have no money, they have no way around it. All they can do is bounce from day to day and hope nobody gets wind of the reality. But sooner or later word will get out that Russian banks haven’t got enough on hand to deal with a run, and many couldn’t operate more than day if there was a high level of withdrawals.

To make things worse, the government’s income and that of its key commercial oil and refining businesses, are in almost as deep a mess. Crude oil income is plummeting, gas income has almost ceased, industry is not making product for export and wealth generation – its making one way weapons of war that end up creating nothing but death and destruction. Occupied Ukraine is a very long way from being a profitable enterprise for Russian exploitation.

Squeezed on its income, trapped in its expenses, running out of money to fund the war – the reality of which is something like 65% of state expenses – facing a looming banking crisis, soaring inflation and what should be even higher interest rates to curb it. Putin personally intervened and stopped that happening taking away the only brake the government had; Russia is in a dire predicament.

It doesn’t have a way out and Putin knows it. The war has gone on too long. If he seeks peace it is unlikely to make any difference to the Russian economy, and that realization is his driving force. It’s all too late, war or peace, the economy is going down.

Putin has cottoned on to the fact that it doesn’t mater what he does, the economic repercussions will be severe, there will be problems and they will be very demanding of the state’s capacity to ensure he remains in power. So if you know and accept these things as inevitable, in Putin’s mind you go for broke. And that’s what he’s doing. The manpower losses don’t matter, as long as the advances continue. Because he now knows the war has to end – but it must be as much as possible on his terms.

It’s my opinion that he has passed the point of caring about the economy beyond it lasting long enough to get where he wants. He wants others to keep it on track and do what they have to do to make it happen, but as far as the war goes, he will keep it going until such times as he gets either a reason to stop it, or his advisers tell him it can’t go on another day, or he faces an abject front line collapse – and I think that’s far from impossible.

Putin’s worry now is that the economy will fail just before he wins the ground war – he knows the West knows he’s in trouble. He worries now that The West will support Ukraine to the point it can outlast what Russia can achieve, and that would be disastrous for him personally, let alone Russia. Ukraine smashes factories and oil logistics and production, gas distribution and manufacturing. The harvest last year was a disaster, fuel prices are rising fast, North Korean forces were a disastrous operation and embarrassing.

Russian soldiers are being sent in to battle on walking sticks and crutches. Does anything tell you more eloquently how bad things are getting? Yet the public are largely ignorant of the situation. Until one day, they wake up with no money in the bank and the wheels fly off the machine of state, stretched too far beyond its capacity to sustain the war any longer.

There are no ‘green shoots of recovery’ for Russia. It’s all going wrong and no mater the sick bravado Putin will no doubt use to pretend all is well. He will bluff it out, bluster has way into negotiations, make all sorts of untenable demands, and as long as he can stave off that day of economic catastrophe he will. Yet his options are growing thinner and few and further between with every passing day. He’s on the point of becoming the Road Runner in the cartoons…legs spinning in mid air with only the canyon far below to fall into.

This war once it reached two years was always about economics. It would be a true triumph if Ukraine could outlast the mighty Russian oil saturated economic monster. Because that’s all it ever had, oil & gas. Who even knows of a genuine Russian manufactured consumer product anyone wants?

If Ukraine and the West keep up their economic pressure the time to collapse is ever shorter. If Ukraine could pull off one medium sized defeat of a Russian operation and drive it back that might be all it takes to break this war wide open and send the Russians packing.

No stopping now.

The Analyst

militaryanalyst.bsky.social